Houston Exploration Reports 2004 Results

The Houston Exploration Company (NYSE: THX) reported full-year 2004 net income of $162.8 million, or $5.44 per fully diluted share, an increase of 30 percent per share over the $131.0 million of net income, or $4.20 per fully diluted share, reported in 2003. Revenues for the year totaled $650.4 million, 32 percent higher than the $492.7 million reported during 2003. Cash from operations before changes in operating assets and liabilities totaled $500.5 million, 25 percent higher than 2003's $399.3 million. (Cash from operations is a non-GAAP measure that is defined and reconciled in the table below.)

Record production was reported during 2004, with the daily average 15 percent higher than 2003 at 339 million cubic feet of natural gas equivalent per day (MMcfe/d). Year-end proved reserves totaled a record 793 billion cubic feet of natural gas equivalent (Bcfe), up 5 percent from 2003. Excluding divestitures, the year-over-year increase in reserves would have been 13 percent.

The company's 2004 capital program totaled a record $516.9 million, including $149.6 million used for acquisitions. Exploration expense accounted for $63.6 million, development for $246.0 million, leasehold and acquisition costs were $57.7 million, and the company had asset sales of $72.7 million.

The company's average natural gas sales price for 2004 was $5.78 per thousand cubic feet (Mcf), yielding an average realization of $5.17 per Mcf after hedging. This compares to a natural gas sales price of $5.23 per Mcf, and a net price after hedging of $4.55 per Mcf for 2003. Crude oil prices averaged $36.85 per barrel for the year, 31 percent higher than the $28.15 per barrel reported during 2003.

Lifting costs, which are comprised of lease operating, transportation and severance tax expenses, were $0.65 per Mcfe versus the $0.69 per Mcfe reported during 2003. Depreciation, depletion and amortization and asset retirement accretion expenses for the year were $2.18 per Mcfe compared to $1.86 per Mcfe in 2003. Net general and administrative expenses for the year were $0.27 per Mcfe in 2004 compared to $0.18 per Mcfe in 2003.

2004 Snapshot:

     *  The company recognized record reserves and production, up 5 percent
        and 15 percent, respectively, compared with 2003.
     *  The company drilled 12 development wells in the Gulf of Mexico, of
        which 100 percent were successful.
     *  The company drilled seven exploration wells in the Gulf of Mexico, of
        which 43 percent were successful.
     *  Onshore, the company drilled 192 wells at an overall success rate of
        84 percent.
     *  The company's Rocky Mountain operations continued to grow.  During the
        year 26 wells were drilled in Utah's Uinta Basin, and in Colorado,
        more than 300,000 net acres were acquired in the Eastern DJ Basin.  At
        the present time, nearly all of the wells are producing in the Uinta
        Basin.  The four wells drilled in Colorado during the last part of
        2004 should be placed on production during the first quarter of 2005,
        along with other wells recently drilled in the area.
     *  In Arkansas, the net production rate was 65 percent greater than 2003,
        and the company continued to break monthly production records
        throughout the year.  Down-spacing approvals to 40-acres were received
        during 2004, which increased the region's reserves by 18 percent year-
        over-year.
     *  The company successfully improved its drilling portfolio after
        purchasing 81 Bcfe of reserves and divesting of 63 Bcfe.
     *  The company improved the liquidity of Houston Exploration stock after
        successfully completing two transactions with KeySpan Corporation
        whereby KeySpan sold its entire position in Houston Exploration stock.
     *  The company continued to conservatively manage its balance sheet,
        closing the year with a debt-to-capitalization ratio of 32 percent.

"I am very pleased that during 2004 the company was able to execute its long-term plan, which included a mix of drilling and third-party transactions in order to achieve yet another year of record reserves and production," stated William G. Hargett, chairman, president and chief executive officer.

"In addition, after closing the transactions with KeySpan, I hope that additional growth opportunities will be available to the company, as our balance sheet is in excellent condition and our borrowing base has been expanded."

Fourth Quarter 2004 Summary:
On January 20, 2005, the company announced preliminary results for several key metrics for the fourth quarter of 2004, which included explanations for any variances from previous quarters or guidance that had been provided. Actual numbers and statements recapping the results are explained in the following paragraphs.

During the fourth quarter of 2004 the company reported net income of $34.8 million, or $1.21 per fully diluted share. This compares with $25.7 million, or $0.82 per fully diluted share in the fourth quarter of 2003. Cash from operations before changes in operating assets and liabilities (a non-GAAP measure) totaled $125.9 million for the fourth quarter of 2004 versus $92.7 million during the similar period of 2003.

Fourth quarter 2004 production averaged 329 MMcfe/d, up 5 percent over 2003's fourth quarter average rate of 312 MMcfe/d. Production was down from what was anticipated primarily due to mechanical problems at the High Island 115 field, where the company lost 9 MMcfe/d for the quarter, and due to delays in receiving the right-of-way approvals necessary to begin producing wells in the Uinta Basin.

The company's fourth quarter 2004 depreciation, depletion and amortization, including asset retirement accretion, was $2.35 per Mcfe, which was $0.16 per Mcfe higher than anticipated, mainly due to higher future development costs related to Gulf of Mexico assets purchased during the fourth quarter of 2004, and the number of undeveloped reserves booked in the Rocky Mountain region during 2004.

Net general and administrative expenses for the quarter were $0.38 per Mcfe, approximately $0.19 per Mcfe higher than the company's prior guidance. Substantially all of this increase related to senior executive organizational changes made within the company during the fourth quarter that resulted in severance expenses totaling $5.1 million for the three executives whose reporting structures were affected.

As with past quarters, Houston Exploration has prepared the following table to assist with understanding the company's estimated financial results and near-term performance based on current expectations.


     2005 Guidance:
     First Quarter 2005 Costs ($/Mcfe)                   Estimate
      -  Lease operating expense                         $0.53 +/-
      -  Severance tax                                   $0.15 +/-
      -  General and administrative, net*                $0.43 +/-
      -  Transportation                                  $0.10 +/-
      -  Depreciation, depletion and amortization
         and asset retirement accretion                  $2.40 +/-
      -  Interest, net                                   $0.14 +/-

     2005 Capital (million $)                            Estimate
      - E&D expenditures
         (excludes acquisition capital)                   $418 +/-
      - G&A and interest                                   $28 +/-
      - Total                                             $446 +/-

     2005 Operations                                     Estimate
      - Production growth from 2004                         6% +/-
      - Percent natural gas                                93% +/-
      - Percent hedged                                     70% +/-

     * Includes additional general and administrative expenses of $5.1 million
       related to entering into new employment agreements with executive
       officers.
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